RETIREMENT PLANS

What are Pension Plans/Retirement Plans?

Retirement Plans are a category of life/annuity plans that are specially designed to meet your post-retirement needs such as medical and living expenses. You would want to maintain the same lifestyle post retirement. There could be an increase in your day-to-day expenses due to an increase in inflation. You would also have post-retirement dreams such as travelling the world, pursuing a hobby, starting a new venture, and more. By planning in advance, you can be financially prepared for your retirement.

This is where pension plans/retirement plans come in. Both pension plans and retirement plans are a category of life insurance plans that are specially designed to meet your post-retirement needs. To ensure that you can enjoy your golden years with financial independence, these plans help cover your expenses and secure your future.

Why do I need to plan for my retirement?

Benefits of Retirement Plans:

• Benefit from the power of compounding: The earlier you invest in a retirement plan, the longer your money gets to grow. Also, the interest earned over time gets re-invested to generate more returns. This is called the power of compounding. This provides you a larger amount for your retirement
• Safety net from unexpected events: Retirement plans ensure that you are financially prepared in case of an emergency. They also provide financial support in case of critical illnesses or permanent disability due to an accident

• Guaranteed regular income for life:

  With Retirement plans, you and your spouse can receive regular pension for life.

• Security for your children in your absence:

  In some retirement plans, your children will receive a lump-sum amount in the absence of both you and your spouse. This helps you leave behind a legacy for your children.

• Tax benefits U/S 80CCC AND 10(10A):

  Apart from enjoying a comfortable retirement, you can also enjoy tax benefits^** on the premium paid up to a limit of ₹ 1.5 lakh.

4 ways to pass on your retirement plan money to your family

How much do I need to save for retirement?

When you retire, your regular income stops. However, even during retirement, you would want to maintain your existing lifestyle and be able to support your family. In addition, there could be increased medical expenses. Hence, it is important to calculate your financial requirements for retirement so that you can be prepared well in advance. It is difficult to determine the exact amount you will require post-retirement, however, below are a few factors that you can consider to arrive at the amount:

• Your day-to-day expenses – This will give you an understanding of how much amount you would need to maintain your current lifestyle even post retirement
• Events and milestones during retirement – There could be financial responsibilities even during retirement, such as paying for children’s higher education or wedding, and more. It is important to include these costs while planning for retirement
• Your post-retirement dreams – You may have dreams that you would want to fulfil post retirement, such as traveling, starting your own venture, and more. These would require a significant amount and hence, it is necessary to include these while calculating the amount you would need during your retirement
• Unforeseen costs – While planning for retirement, you should keep some amount aside for any uncertainty, such as medical expenses, or any financial emergency
• Inflation – This leads to an increase in the costs of goods and services, which requires you to pay an additional amount to consume the same goods and services at a later period. For example, if your current expenses amount to ₹ 6 lakh annually at the age of 45, to maintain the same lifestyle post retirement, you would require ₹ 14.38 lakh annually at the age of 60 assuming 6% inflation year-on-year. Hence, while calculating the amount you would need for your retirement, it is important to factor in inflation as well

You can also use the our Retirement planning calculator to calculate the amount you need to save for your retirement.

How do I choose a pension plan?

It is important to have enough money to ensure your financial freedom during your golden years. Basis your post-retirement dreams and goals, you may require the money either in the form of a lump sum, a regular income, or both. Understanding the below factors will help you choose the right pension plan that will best suit your requirements.

• Returns from the plan – It is ideal to look for plans which offer higher returns. A plan that you invest in, should provide high returns and be able to cover your post-retirement needs
• Guaranteed pension – Risk appetite decreases with age. For your retirement, you may want to invest in a plan that provides guaranteed returns, free from market fluctuations. This will help ensure that your post-retirement goals are fulfilled, no matter what. Some plans offer guaranteed pension not just to the policyholder but also to the spouse in the event of an unfortunate event. Such plans ensure financial independence for you and your loved ones
• Flexibility – As you move closer to your retirement, you may want to do more than what you planned at the time of purchasing the pension plan. This may require you to increase your investment towards the plan. Look for a plan that gives you the option to increase your premium contribution through top-ups. Also, look for features such as flexibility in paying premiums (monthly, half-yearly, yearly), multiple payout options, and more
• Bonus and other benefits – Most retirement plans offer bonuses and benefits for staying invested. These bonuses and benefits that you get over the years will add to the returns from the plan and provide you with a larger retirement fund. Hence, it can be beneficial to go for a plan that provides you with these benefits

Why should I start planning for my retirement now?

How do pension plans work?

Upon retiring, your regular income flow dries up and meeting day to day expenses can become a problem. A pension plan ensures that your income flow continues well beyond your retirement. Pension plans let you accumulate a corpus of funds through a lump sum investment or premiums that you pay over a period of time. Upon retirement, you receive regular payments from your corpus to ensure that the expenses can be met and your future is secure.

Types of pension plans in India

• Immediate Annuity:

  You may opt for this option in case you are nearing your retirement.

• Deferred Annuity:

  You may opt for this option in case you have a few years ahead of you before your retirement.

• National Pension Scheme:

  You may opt for this scheme if you are early on in your career and have a long time ahead for your retirement.

Benefits of pension plans

• Regular Income Post Retirement

  You receive a guaranteed amount of money on a regular basis after you have retired from work.

• Insurance Cover

  Most pension plans have an included insurance cover that protects you and your family from any possible financial burdens.

• Tax Benefits

  Depending on the policy chosen by you, there are certain tax benefits and exemptions that you can avail of^**.

• No-Risk Investment

  Pension plans provide you with unconditional protection from any and all investment risks.

• Option to Add Riders

  You can enhance your pension plan by adding certain riders like 'disability due to accident' or 'critical illness'.

Features of Pension Plans

• Annuity or Life long income

  It is the regular payment that you receive from your investment. You get this income throughout your retirement.

• Vesting Age

  The vesting age is the age at which you start receiving your pension payments. You may choose to start getting the income immediately or at a later date.

• Accumulation Period

  This refers to the entire period in which you pay premiums towards the pension plan. For example, if you start investing in a pension plan at the age of 40 till the age of 60, then the accumulation period is 20 years.

• Payment Period

  The payment period is the entire period during which you will receive the pension after your retirement. For example, if you retire at 60 and receive your pension till the age of 80, then the payment period is 20 years.

Factors to consider while buying Pension Plans

• It should cover your expenses post retirement

  Once you retire and your regular source of income stops, your pension needs to cover all your expenses. This includes your day-to-day expenses, travel expenses, your child’s education, wedding expenses, and more.

• It should provide inflation-beating returns

  As time passes, with rising inflation, the cost of goods and services increase. This means that you will need a larger amount to maintain even the same standard of living post retirement. Thus, you should look for a plan that provides returns that can cover for inflation as well.

• It should provide income for life

  As the regular income stops during retirement, it is important that the pension plan covers all your expenses for life. There are pension plans that offer annuity payments throughout your life. This will help you stay financially prepared to meet your post retirement expenses.

• It should cover medical emergencies

  It is important that your pension plan provides you financial cover in case of a medical emergency. Some pension plans provide financial protection against critical illnesses and disability due to an accident. This can be helpful in case of a medical emergency during retirement.

When is the right time to invest in a pension plan?

You can invest in pension plans any time as per your requirements and convenience. However, the sooner you invest, the better it is. You will have more time to contribute to your retirement savings and allow your money to grow. Also, if you invest early, you can contribute lower amounts over time as compared to when you are older. This way, you will be able to invest a large amount for your retirement over time without impacting your current budget

COMP/DOC/Dec/2021/2712/7142

Eligibility criteria for Pension Plans

• Minimum and Maximum Entry Age

  For most pension plans, the minimum age of entry is generally 18 while the maximum entry age is 70.

• Annual Premium Amount

  There is no maximum limit, and the minimum annual premium amount is close to ₹ 50,000/- in most cases.

• Minimum and Maximum Vesting Age

  The minimum vesting age is 30 years while the maximum age is 80 years.

• Premium Payment Term

  Generally, the premium has to be paid for the same period as that of the chosen policy term.

• Policy Term

  Depending on the chosen pension plans the policy term generally ranges from 10 years to 30 years.

Documents required to buy a Pension Plan in India

• Age Proof

  Birth Certificate/Passport/Driving License/Voter ID Card/High School Certificate.

• Identity Proof

  Aadhaar Card/Passport/Driving License/Voter ID Card/PAN Card.

• Address Proof

  Aadhaar Card/Passport/Driving License/Ration Card/Electricity Bill/Telephone Bill.

• Income Proof

  Bank Statement Slip/Salary Slip/Income Tax Return File.

• Medical Reports

  Some insurance providers may ask for medical reports before you can buy a pension plan from them.